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3 Ways lululemon's Earnings Impressed Investors

Investors had good reasons to expect positive news from lululemon athletica (NASDAQ: LULU) as it closed out 2018 and looked ahead to a new fiscal year. Industry trends have been supporting healthy growth lately, and the retailer has outpaced peers thanks to booming demand online and a flood of popular apparel innovations.

But Lululemon found a way to stretch past even those high expectations. On Wednesday, the chain surpassed management's guidance for the fourth straight quarter while issuing an aggressive outlook for the new year.

A woman doing yoga in front of French doors open to a courtyard filled with plants

Image source: Getty Images.

Sales growth held up

Sales landed well above the upgraded guidance that CEO Calvin McDonald and his team issued back in early December. Comparable-store sales spiked 17% after accounting for currency swings, as customer traffic improved both online and at Lululemon's physical stores. In contrast to Nike (NYSE: NKE), the sporting apparel chain noted hardly any slowdown between the third and fourth quarters. Nike has been attacking the yoga apparel niche more directly lately, but the moves haven't knocked Lululemon off of its growth game.

The outperformance meant that Lululemon reported $1.2 billion in revenue for the quarter, a 27% increase year over year. Executives just three months ago targeted sales of roughly $1.1 billion, which would have marked a 20%-plus spike. Commenting on the broader full-year results, management said the company "delivered one of its strongest years yet, as a result of broad-based strength across the business."

Profitability improved

The retailer also notched a few notable financial wins. A steady drumbeat of new product releases, plus the shift toward higher-margin online sales, helped gross profit margin jump to 54.4% of sales from 52.2% a year ago. Nike's comparable figure rose to 45.1% of sales from 43.8% over roughly the same period.

Lululemon held the line on expenses, too, so that operating margin increased to 18.2% of sales from 17.4%. Together, these positive shifts delivered pre-tax income of $138 million compared to $108 million a year ago. "The trends we've seen all year in traffic, guest engagement, and product margin," COO Stuart Haselden said in the investor conference call, "contributed to our nearly 40% increase in adjusted [earnings per share] in the quarter."

The outlook is brighter

Those successes allowed Lululemon to meet or exceed its 2020 goals for operating margin, gross margin, and e-commerce penetration, which just passed 26% of the broader business. Achieving those targets two years ahead of schedule gave management confidence to predict solid sales and earnings growth ahead, with revenue set to rise 12% to between $3.7 billion and $3.74 billion. Earnings should land somewhere between $4.48 and $4.55 per share compared to adjusted profit of $3.84 in fiscal 2018.

That per-share earnings forecast is likely a bit conservative because it doesn't factor in the significant stock repurchase spending that management will make this year. "We believe that repurchasing our shares is an efficient and effective sway to return excess cash to shareholders," CFO PJ Guido said, "and we'll continue to be opportunistic with our repurchase activity."

But the better news for shareholders is that Lululemon is ahead of schedule in its plan to surpass $4 billion of annual sales by 2020. And with cash pouring into the business, the chain has plenty of resources it can dedicate toward supporting its gathering sales momentum both online and across its physical store footprint.